Two notes, same yield on paper: high-equity borrower at 9% or thin-equity borrower at 13%

I'd take the equity every time, and my reason has nothing to do with the borrower. It's that 22 years of amortization on a 44% ITV loan is a position I can sell to somebody else at almost any point in the cycle. Thin-equity paper at 78% ITV in a small market has a narrow buyer pool the moment yields move, so you're pricing an exit you may not get. Your point about principal returning faster on B is real but it cuts the other way too, because you get handed cash back into whatever the reinvestment environment looks like in year three, and you don't know what that is. On the cushion question, cushion is only worth what the foreclosure timeline lets you collect, and that swings hard by state, some judicial states running well over a year before you have anything. So check the timeline in the specific state before you count the 44% as protection. In A you can be wrong about the borrower and be fine. In B you have to be right.

The thing that jumps at me is the credit profiles, probably because I've been buried in tenant screening files for two months. Mid 500s on note B doesn't scare me as much as it would have a while ago, since the borrower was underwritten at that level and has paid at that level, so nothing has deteriorated. What I'd want to know is where the money is going out the door each month besides your note. On A the borrower is self-employed with a cured forbearance, and self-employed income in a house that's more than half paid off still swings around, so the cured forbearance is a signal about volatility rather than a closed chapter. Nineteen months versus forty-one months is a real gap though, and I'd feel differently about B after another year of tape. Canton, did either seller give you actual bank-level payment records or just a servicing history spreadsheet, because I've read enough here to know those aren't the same document.

Voted for B and I'll own the reason, which is that I've been getting my teeth kicked in by low-yield positions that look safe and then eat time. The 44% ITV note is a fine asset and it also pays you ten. If you're going to spend the same diligence hours on either file, the one that pays fifteen is doing more work per hour of your attention. Parcel's liquidity point is the strongest argument against me and I don't have a great answer, except that I'm not planning to sell a 14 year note, I'm planning to hold it to the end, and I don't much care what the secondary market thinks in year five if the payments keep landing. What I'd push back on with A is that 22 years is a long time to be exposed to one household's income. Refi risk cuts your yield if they leave early and default risk cuts it if they stay and stop paying, and over 22 years one of those two things is likelier than not.

For anyone following this who hasn't priced a note yet, a couple of the terms in play here are worth pinning down.

UPB is unpaid principal balance, the amount the borrower still owes. Buying at 88 or 92 of UPB means paying that percentage of the balance, and the discount is why the yield you earn is higher than the coupon written on the note.

ITV is investment to value, the price you paid measured against the collateral's value. It's the cushion people are arguing over. Lower ITV means more equity sitting under your position.

On the disagreement itself, the two candidates trade different risks rather than the same risk at different prices. A wide equity cushion limits what a default costs you, and it only converts to cash through a foreclosure or a sale, and both the timeline and the cost of that process vary substantially by state, with judicial foreclosure states generally running longer than non-judicial ones. Confirm the process and expected timeline for the specific state in writing with a local attorney before you count on the cushion. A higher coupon and a shorter remaining term return capital faster, which shrinks the amount you have at risk each month.

Whichever way this poll lands, both cases depend on the same underlying assumption, which is that the collateral value estimate is honest. A drive-by BPO in a thin market has a wider error band than one in a metro with steady comparable sales, and roughly a dozen states do not publish sale prices at all, which makes independent verification harder in those markets.

Nobody has priced the house in either scenario and that's where I live. If note B goes sideways and you end up owning the collateral at 78k of stated value, you are inheriting a small-market house that a mid 500s borrower has been maintaining on a stretched budget. I've walked those. Roof at the end, one mechanical system past due, and a kitchen that reads as fine in photos and is not. Call it 18 to 30k before it's sellable, and in a market that thin your list-to-close is going to be slow. That erases the ITV cushion you thought you had and then some. On note A the same problem exists but you've got 100k of equity between you and the repair bill, so the math survives a bad walkthrough. Canton, if you take B I'd underwrite it as though you'll own the house, price the rehab you can't see, and then see whether 15 still clears. My guess is it lands closer to A than you'd like.

Small markets are what I look at all day and harrow is right about the repair math, but the 78k value is the part I'd fight about first. In markets that thin a drive-by BPO can be off by 15 percent in either direction because there might be four comparable sales in the last year and two of them were between family. So your 78% ITV could be 90% ITV and you'd never know until you needed the number. Even so, I voted B, because the borrower profile there is the one I actually understand. Somebody buying a 78k house on seller financing at 13% in a small town has very few other options for shelter at that payment, and that tends to make people pay. The 22 year metro borrower with 100k of equity has options, including selling and walking away with a check, which is a payoff not a default but it still ends your 10% early. Canton, what does B's prepay penalty look like, if any.